Quiz 1 Review

Question 1

Intrinsic Value

Answer 1

theoretical internal value a person puts on an item

Question 2

Market Value

Answer 2

the price that a buyer and seller agree to exchange

Question 3

Theoretical value

Answer 3

to be willing to make a transaction, the buyer and seller decide the appropriate price

Question 4

Goal of Financial Management

Answer 4

maximize the market value of the firm

Question 5

Capital Budgeting

Answer 5

evaluates the size, timing, and risk of future cash flows

Question 6

Capital Structure

Answer 6

the mixture of a firm’s debt and equity

Question 7

Working Capital Management

Answer 7

management of the day-to-day finances of the firm (current assets and liabilities)

Question 8

Goal of the Firm

Answer 8

maximize shareholder wealth in an ethical manner

Question 9

Decision Rule for Managers

Answer 9

only take actions that are expected to increase the share price

Question 10

Stakeholder Focus

Answer 10

a firm avoids actions that would prove detrimental to stakeholder (considered socially responsible)

Question 11

Business Ethics

Answer 11

the standards of conduct or moral judgement that apply to persons engaged in commerce

Question 12

Ethics programs seek to:

Answer 12

reduce litigation and judgement costs, maintain a positive corporate image, build shareholder confidence, and gain loyalty and respect of all stakeholders

Question 13

corporate governance

Answer 13

the rules, processes, and laws by which companies are operated, controlled, and regulated

Question 14

principal-agent relationship

Answer 14

an arrangement in which an agent acts on the behalf of a principal (ex. shareholders of a company elect management to act on their behalf)

Question 15

agency problem

Answer 15

arise when managers place personal goals ahead of the goals of shareholders

Question 16

agency costs

Answer 16

arise from agency problems that are born by stakeholders a represent a loss of shareholder wealth

Question 17

management compensation plas

Answer 17

strengthen corporate governance by ensuring that managers’ interest are aligned with those of shareholders

Question 18

incentive plans

Answer 18

management compensation plans that tie management compensation to share price

Question 19

performance plans

Answer 19

tie management compensation to measures such as earnings per share or growth in EPS

Question 20

sole proprietorship

Answer 20

a business owned by one person

Question 21

SP advanatges

Answer 21

easily established, minimal organizational costs, keep all generated profits

Question 22

SP disadvantages

Answer 22

unlimited liability, losses absorbed by owner, limited capital, limited life, profits are taxed as personal income, obtaining additional equity is dependent on the owner’s personal finances

Question 23

General Partnership

Answer 23

a partnership in which all owners share in operating the business and in assuming liability for the business’s debt

Question 24

GP Disadvantages

Answer 24

unlimited liability, must be dissolved or reorganized if a partner leaves or dies, each partner is liable for the total debts of the partnership

Question 25

GP Advantages

Answer 25

minimal organizational requirements, negligible government regulations

Question 26

Limited Partnership

Answer 26

a partnership with one or more general partners and one or more limited partners

Question 27

LP Advantages

Answer 27

limited liability, losses limited to capital invested

Question 28

LP Disadvantages

Answer 28

Not active in management, less favorable allocation of ownership/profit/losses

Question 29

Limited Liability Corporation

Answer 29

a hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership

Question 30

LLC Advanatges

Answer 30

limited liability, no double taxation

Question 31

LLC DIsadvantages

Answer 31

relatively new (some legal issues not yet defined)

Question 32

Corporation

Answer 32

a business owned by stockholders who share in its profits but are not personally responsible for its debts

Question 33

Corporation Advantages

Answer 33

limited liability, permanency, transferability of ownership, better access to capital, able to raise larger sums of equity capital, expansion potential

Question 34

Corporation Disadvantages

Answer 34

double taxation, time and cost of incorporations, separation of ownership and management (agency problem)

Question 35

Factors affecting value of company and stock price

Answer 35

size, timing, and risk of cash flows

Question 36

secondary market

Answer 36

market for reselling financial assets

Question 37

time series analysis

Answer 37

evaluation of the firm's financial performance over time using financial ratio analysis

Question 38

Cross-Sectional Analysis

Answer 38

the comparison of different firm's financial ratios at the same point in time

Question 39

DuPont System of Analysis

Answer 39

used to dissect the firm's financial statements and to assess its financial condition by merging the income statement and valance sheet into two summary measures of profitability

Question 40

Financial Leverage Multiplier (FLM)

Answer 40

the ratio of total assets to common stock equity

Question 41

ROE =

Answer 41

ROA * FLM

Question 42

ROA =

Answer 42

Net profit margins (NPM) * Total asset turnover (TAT)

Question 43

Current Ratio =

Answer 43

Current assets / current liabilities

Question 44

Quick Ratio =

Answer 44

(current assets - inventory) / current liabilities

Question 45

Cash Budget/Forecast

Answer 45

a statement of the firm's planned inflows and outflows of cash that is used to estimate its short-term cash requirements

Question 46

Sales Forecast

Answer 46

a prediction of future sales activity during a given period, based on external and/or internal factors

Question 47

External Forecast

Answer 47

a sales forecast based on the relationships observed between the firm's sales and certain key external economic indicators

Question 48

Internal Forecast

Answer 48

a sales forecast based on a buildup, or consensus, of sales forecasts through the firm's own sales channels

Question 49

Average Tax Rate (ATR) =

Answer 49

Total tax paid / total taxable income

Question 50

Marginal Tax Rate

Answer 50

the amount of tax that will be due on the next dollar of taxable income earned

Question 51

OCF =

Answer 51

EBIT (earnings before tax - Dep.) + Dep. - Tax

Question 52

NWC =

Answer 52

Current assets - current liabilities

Question 53

Cash Flows from Assets (CFFA) =

Answer 53

OC - Capx (FA1 - FA0 + Dep.) - Change in NWC

Question 54

Cash Sources

Answer 54

assets decrease, liability and equity increase

Question 55

Cash Uses

Answer 55

assets increase, liability and equity decrease

Question 56

Pro Forma Statements

Answer 56

projected or forecasted income states and balance sheets

Question 57

Percent-of-Sales Method

Answer 57

A simple method for developing the pro forma income statement; it forecasts sales and then expresses the various income statement items as percentages of projected sales